Chapter 26-Alterations Flashcards
There are 2 broad categories of alterations which can be made on conventional without profits contracts (excluding surrendering).
One of these is the ‘paid up’ (PUP) alteration.
Discuss this alteration in general terms (5)
PH can stop paying regular prems, and still receive some eventual benefit (becomes similar to single premium policy)
T&Cs of original contract unchanged, except SA is reduced reflecting no more future regular prems
effectively, policy value at PUP date used as single prem for new pol (excluding another round of init expenses)
basis used for PUP value might differ from SV for 2 reasons
+costs of making pol PUP not equal to costs of paying SV
+may be less mortality selection effect, because PH keeps pol in force
State the three principles that should be considered when calculating the paid-up sum assured
(1) Be supported by earned asset share on the date of conversion
(2) At later durations be consistent with the projected maturity values allowing for premiums not received
(3) Be consistent with surrender values so that surrender before and after the conversion is approximately equal
There are 2 broad categories of alterations which can be made on conventional without profits contracts.
One of these is the ‘general alterations’, excluding paid ups.
Discuss this group of alterations in general terms:
Why might such general alterations arise? (2)
Give examples of general alterations (4)
What key factor regarding consistency relates to proposed alteration terms proposed by insurer? (3)
Describe the link which arises between alterations and common occurrences (4)
Arise because life insurance contracts are long term
PH maybe had sound idea of risks/needs when first purchased, but over time a mismatch arose between cover provided and current risks faced by PH
4 examples of general alterations include
+change term of assurance
+change type of contract eg from whole life to endowment
+change sum assured
+change premium payable
It is important to note
+insurer will quote T&Cs for proposed alteration, but ultimately PH decides
+hence important that terms offered for a given alteration are consistent
+with terms offered on other alterations eg SVs and
current terms offered for new policies
There is a link between alterations and common occurrences
+we refer to these as being boundary conditions for each other eg
+reduce policy term to zero, equivalent to surrender
reduce sum assured so no future prems required, equivalent to calc’ing PUP SA
+increase SA, similar to keep original pol + buy increment pol at current premium rates
Give 7 principles that should guide the calculation of terms to offer under general policy alterations
Affordability of offered benefits from insurer’s view
(1) terms after alteration supportable by earned asset share
+future benefits plus expenses on altered pol shouldn’t need more than future premiums after alteration plus
current asset share
(2) profit expected from contract after alteration should be same as that before, or alternatively same as expected amount had policy been written originally on its altered terms
(3) costs associated with carrying out alteration should be recovered
Consistency with boundary conditions
(4) T&Cs of new policy, consistent with paid-up sum assured, surrender values, and current premium rates (as relevant)
As outstanding term changed to zero, premium charged consistent with difference between surrender and maturity value
(surrendering policy = limiting case of reducing policy term)
premium after alteration approach zero as sum assured approach PUP value
(conversion to PUP = limiting case of reducing premium)
premium after increased benefit/term consistent with terms on new/current pol
+increased benefits=> terms consistent with additional premium for new pol with SA equal to proposed increase
Other principles
Fairness
(5) any increase in benefit may be subject to additional evidence of health, to avoid potential anti-selection, depending in part on scale of alteration and when it occurs in policy’s lifetime
Lapse and re-entry
(6 )increases in premiums or benefits or term should reflect terms available for new business, in particular to minimise risk of lapse and re-entry
Stability
(7) Small changes in benefits should result in small changes in premium
The principles set out in
chapter 25 relating to this section also apply here
What 2 broad methods do we have to calculate alteration terms?
Proportionate paid up values
+approximate method
+can be used to simplify calculation of PUP values
Equating of policy values
+most accurate method
Describe the ‘Proportionate PUP values’ used for policy alterations
How does the method generally work? (4)
For without profit endowments, PUP may be calculated as
+basic sum assured
+multiplied by ratio of total number of premiums actually paid to those originally payable throughout the total term
How does the proportionate PUP method of calculating policy alterations perform in terms of meeting the principles which should be considered when setting alteration terms ?
Advantages (1)
Disadvantages (4)
Advantages
Simple to apply and explain to PHs
Disadvantages
+values too high at short durations: don’t allow for high initial expenses.
+values too low at medium durations: don’t allow for investment earnings.
+not consistent with surrender values
Method will give PUP values from very beginning
Surrender value usually only available some time into policy, say 2 years when asset share positive (which contradicts offering PUP value from beginning)
usually expect PUP value to only be offered after surrender value, as PUP policy still has renewal expenses (unlike surrendered contract) which need to be supported and would reduce earned asset share
What is the overriding method used when calculating terms for policy alterations using equating of policy values?
(3)
Value of contract before alteration
+on a prospective or retrospective basis,
+…can be equated to a prospective value after alteration that takes into account the requested changes to the terms of the contract.
The method can essentially be used for any type of alteration, including conversion to paid up status
The alteration terms can be made appropriate in almost all circumstances, provided appropriate bases are chosen
In terms of meeting the principles that should be followed when calculating alteration terms, outline the main advantages (5) and disadvantages (1) of equating policy values to calculate alteration terms.
Advantages
(1) Will produce consistent surrender values before and after alteration if the same methods and assumptions are used as for calculating surrender values
(2) For an extension of term or increase in benefit, use of the current premium basis to calculate the before and after alteration policy values would ensure consistency with the terms for new contracts (unclear if other bases would)
(3) There will be consistency between the terms for alterations, surrender values and conversions to paid-up status, if the same bases are used
(4) Assuming the same basis is used for before and after policy values, the method is stable
(5) Provided the policy value before alteration isn’t greater than the earned asset share, and the basis for the policy values after alteration is not weaker than a best estimate basis, the alteration terms should be affordable.
Disadvantages
Lapse and re-entry may be possible - the company would need to check the revised premium against that for a completely new contract
Give a brief overview of what factors to consider when determining the basis used for setting alteration terms (4)
No assumptions are required for the proportionate paid up approach
We need a set of assumptions for equating policy values, and should consider the following
+The expected profit from the altered contract
+What kind of assumptions to use
+Impact of selection
What does the total profit from an altered contract depend on? (2)
the method and basis for calculating the policy value before alteration, which determines profit “released” at time of alteration
the method and basis for calculating policy value after alteration, which determines the profit expected to emerge over remaining contract term
What profit will be “released” at alteration date for the various bases used for the policy value before alteration? (3)
full expected profit under unaltered policy, if realistic/best estimate prospective val used for policy value before alteration
no profit at all, if earned asset share is used for policy value before alteration
something between, if prospective value using a basis incorporating margins is used for policy value before alteration
What profit will be expected to emerge from the alteration date, over the remaining life of the altered contract, for the various bases used for the policy value after alteration (2)
no profit at all, if realistic prospective value used for policy value after alter
profit corresponding to margins in assumptions, if prospective value using a basis incorporating margins is used for policy value after alteration
